What happened

Annaly Capital Management (NLY 0.96%) struggled in February as its share price dropped 11.9% for the month, according to S&P Global Market Intelligence. The stock is trading at about $20.25 today, down 3.9% year to date.

The major market indexes were all down in February as the S&P 500 fell 2.6%, the Dow Jones Industrial Average dropped 4.2%, and the Nasdaq Composite was down 1.1% for the month.

So what

In February, the catalyst for Annaly Capital, a mortgage real estate investment trust (REIT), was its fourth-quarter earnings report. The company fell short of earnings and revenue expectations, which caused the stock price to drop after the Feb. 8 report came out. 

It is not a great market for housing or mortgages, but Annaly Capital performed worse than some analysts expected, with earnings available for distribution of $0.89 per share for the quarter. Analysts had anticipated $0.93 per share; it was $1.14 per share a year ago this quarter.

Also, net interest income came in at $135.1 million, which was down from $361 million a year ago due to higher interest expenses. The company declared an $0.88 quarterly dividend.

Now what

It has been a historically bad housing market with mortgage rates rising and inventories shrinking, down 28% year over year, said CEO David Finkelstein in the fourth-quarter earnings call. At the same time, home prices have declined slower than expected, down just 3.6% from the June peak.

With interest rates expected to continue to rise, mortgage rates will likely remain elevated, which will likely result in another challenging year for REITs.

But the primary interest of investors in Annaly Capital right now is its dividend, as REITS, by law, are required to pay out 90% of their taxable income in dividends.

Annaly Capital has an extremely high 17.3% yield. That's very enticing to income investors, but the yield is higher than normal. And that is a red flag: It means that its share price -- and by extension, earnings -- have dropped.

In this case, it appears a bit too high to be sustainable, as Finkelstein indicated in the earnings call. He said the company expects "to reduce our quarterly dividend in the first quarter of 2023 to a level closer to Annaly's historical yield on book value of 11% to 12%."

That likely also contributed to the February sell-off.